INCOME TAX ACT, 1961

Section 4

Income - Capital or revenue receipt - Compensation received from relinquishment of right to sue for breach of contract -

Assessee had entered into the development agreement along with preemptive purchase right with societies for land owned by them. But, subsequently societies terminated the agreement with assessee after making payment of the compensation to assessee for relinquishment of right to sue the societies as there was the breach of contract on their part. Amount of compensation received by assessee was recorded as capital receipt not chargeable to tax . However, AO held that entire transaction/activities for development of the land, termination of development agreement and subsequent sale of lands to the parties and amount of compensation received by assessee was nothing but a device used to escape from the tax liability. Accordingly, amount of compensation received by the assessee was treated as revenue receipt.Held: It was pertinent to note that parties involved in entire flow of transactions namely, assessee, societies and buyers of land, were separate taxable and independent persons/entities viz-a-viz complying provisions of the Act. Thus amount of the compensation received by the assessee for relinquishment of its right to sue from societies to avoid litigation could not be treated as a colorable device and once, agreement was terminated by society, only right available to assessee was to file sue in court of law for breach of the contract. Such right could not be termed as capital assets within meaning of section 2(14) read with section 45 and therefore, compensation received by assessee in lieu of filing sue in court of law against the society for termination of agreement, represented capital receipt not chargeable to tax.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2012-13

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